A fresh focus on Social Security in budget debate

WASHINGTON 
In the midst of the budget crisis, an old debate has broken out with new force: Should Social Security be seen as part of the deficit that Washington needs to rein in?

The White House is balking at calls to tackle Social Security's financial problems now, before baby boomers swamp the system. But the massive retirement program, like the rest of the government, is running a deficit and has become part of the argument on Capitol Hill.

The elderly and disabled don't need to worry about losing their benefits or seeing them cut anytime soon. The Obama administration is correct in asserting that Social Security doesn't face an immediate crisis. But the program's red ink will only get worse the longer policymakers don't act.

While Congress has spent the past several weeks debating how much to cut government spending through September, a growing number of lawmakers say they also want to act on long-term concerns about benefit programs like Social Security, Medicare and Medicaid.

"If you don't think Social Security is becoming unraveled as a safety net, you're not listening," says Sen. Lindsey Graham, R-S.C. "This year it is paying more in benefits than it collects in taxes. Once it goes off this cliff, it goes fast."

House Republican leaders say their budget plan for next year will address entitlement programs, including Social Security. President Barack Obama kept the administration's hands off the big benefit programs in his budget plan for next year, saying it will take time to create the political environment necessary for Democrats and Republicans to negotiate in good faith on such difficult long-term issues.

But Social Security's problems do have some immediacy. Last year's $37 billion operating deficit - the first since the system was last overhauled in the 1980s - is expected to grow to $45 billion in 2011. Over the next decade, the program is projected to run up more than $500 billion in operating deficits if Congress doesn't act, according to the nonpartisan Congressional Budget Office.

White House officials and some Democrats in Congress say not to worry: Social Security has built up a $2.6 trillion surplus over the past 30 years.

"Social Security benefits are entirely self-financing," White House budget director Jacob Lew wrote in a Feb. 21 article in USA Today. "They are paid for with payroll taxes collected from workers and their employers throughout their careers. These taxes are placed in a trust fund dedicated to paying benefits owed to current and future beneficiaries."

That argument, however, overlooks a nagging fact: The money in the trust funds has been spent over the years to help fund other government programs. In return, the Treasury Department issued bonds to Social Security, which earn interest and are backed by the government, just like bonds sold in public debt markets.

When Social Security runs a deficit, it redeems its bonds with the Treasury Department to cover the red ink. But Treasury gets the money to pay Social Security the same places the government gets all its money: either from taxes and other revenues or by borrowing it. Last year, the government borrowed 37 cents of every dollar it spent. This year it's borrowing 43 cents of every dollar.

Here is how Lew described the Social Security trust funds when he was budget director under former President Bill Clinton, in Clinton's 2000 budget request:

"These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures."

Few on Capitol Hill are suggesting that the federal government won't make good on its IOUs to Social Security. But now that it is time to start repaying Social Security, Lew's decade-old analysis of where the money will come from still holds true.

"The only way those bonds are redeemed is out of current income, and Social Security is cash negative today," said Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee.

Advocates for Social Security say the program is being unfairly blamed for the budget deficit, and they worry that benefits could be put on the chopping block. They correctly argue that Social Security did not cause the nation's fiscal problems. For the past 30 years, when Social Security posted big surpluses, the program actually reduced the amount of money the federal government had to borrow on public debt markets.

"Blaming Social Security for our deficit is nothing but an ideological attempt to slash benefits and privatize the program," said Sen. Charles Schumer, D-N.Y.

The problem, as Lew points out, is that the rest of the government has been running up big budget deficits, including a record $1.5 trillion deficit this year. The national debt now tops $14 trillion, including the $2.6 trillion owed to Social Security.

In the short term, Social Security is suffering from a weak economy. Payroll taxes that finance the program are down and applications for benefits are rising because fewer people are working. In the long term, Social Security will be strained by the growing number of baby boomers retiring and applying for benefits.

The Social Security trust funds are projected to be drained by 2037 if Congress does not act, according to the trustees who oversee the program. At that point, payroll tax receipts would be enough to pay about 78 percent of benefits.

"We can either wait and have huge problems, and it won't be here for my kids and grandkids, or we can address it now, make relatively small changes and make sure that it's going to be safe for the next 75 years," said Erskine Bowles, who served as chief of staff under Clinton and co-chaired the recent deficit commission under Obama. "I think this is all about politics now because I haven't met anybody here on the left or the right that doesn't see the arithmetic."